2012 Forecast

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From the worsening economy to growing competition from big banks, the mortgage industry has many hurdles ahead for 2012. CMP talked to various brokers and lenders and asked them what they see as some of the biggest challenges for the New Year — and more importantly, how to meet them head on

First and foremost on everybody’s minds was the economy, which is hardly a surprise. Global debt problems have wreaked havoc on consumer confidence levels, making something like the decision to buy a house even more daunting.

“I think the never-ending stream of opinion, doubt and fear that is permeating the news will keep a lot of people from confidently making personal financial decisions — be it purchasing a home, investing, etc.,” said Gord McCallum of First Foundation Mortgages in Alberta.

But there is always a silver lining, especially for Canadian brokers. “We’ve got this terrible economy, but we have good labour forces and a stimulus environment,” said Invis/ MI’s executive VP and CFO Cameron Strong, predicting that central banks will continue to keep rates low. “Households are taking advantage of those low rates and increasing household debt. As brokers, we’re not financial planners, but we can certainly try to help,” he said.

The lending landscape

But of course, it’s not just brokers who have to deal with the challenging economy. Lenders, too, list it as one of the biggest potential issues of 2012.

“So much of what happens in the global economy is beyond our control. The question then becomes how prepared are we to face the challenges that may arise?” said Boris Bozic, president and CEO of Merix Financial, adding “prudent lending and mitigating risk will be a theme for 2012.”

In fact, from mitigating risks to a focus on efficiency ratios and encroaching continue to play a huge role in the New Year.

“Regulatory involvement will continue to grow,” said Martin Reid, president of Home

Trust, citing a discussion paper from the Office of the Superintendent of Financial Institutions that deals with changing mortgage-lending rules.

The paper, which is part of a process to strengthen global residential mortgage underwriting practices, concludes that “Given the current uncertainty and volatility in global capital markets, historically low interest rates, higher Canadian borrower debt-to-income levels, and relatively strong housing price appreciation, OSFI expects [federally regulated financial institutions] to be extra diligent in maintaining sound and prudent mortgage underwriting practices.”

Of the paper’s findings, Reid said “I don’t think there will be a material impact on the market, but this could change the requirements for mortgage lending. I think mortgage brokers will continue to be a growing part of the market but at a slower pace.”

Bozic echoes the paper’s concern over growing debt levels: “Warning bells are starting to ring again, and it’s an issue that the federal government will monitor closely,” he said.

But for brokers who have been in the business for a while, these are all things they’ve heard before. “Business is cyclical and there are always competitive, economic or regulatory issues affecting our market,” said Colin Dreyer, president and CEO of Verico Financial Group, stressing that the important thing, as an industry, is to “acknowledge and accommodate to those factors while we find innovative ways to connect with consumers and show our value while we meet their financial requirements.”

For brokers, having a good relationship with lenders is one of the key steps in meeting client demands. According to Bozic, there are two ways to do this. “Good efficiency ratios and good quality business would top my wish list,” he said.

“I can’t speak for the other lenders, but in my world it’s about identifying those brokers who truly want to develop a strategic working relationship with us,” he added. “As much as we would like to be all things to all brokers, the reality is that it is not possible.”

But as lenders continue to worry about building relationships with quality clients, brokers have their own concerns about lenders in 2012. it is up to us. Yes, we represent the best interest of the client, but the lenders are our partners, and it is very important we understand that our success is tied to theirs.”

It’s a sentiment shared by Invis/MI’s Strong, who said, “lenders are getting much closer to us [brokers] every week because they worry about the channel. Are we looking after our after-sales communication? They also worry about the financial viability of our firms. It is tight, after all, for most broker houses if they’re trying to survive with just the mortgages.”

It’s one of the reasons that Invis/MI is developing its own mortgage investment corporation. “It gives our brokers another lender that is going to cater to them and offer products that the marketplace doesn’t have. Plus, if a lender does exit the market, you can go duplicate it within the MIC. That’s the idea: to become another lender for the broker chain, especially if everyone is suffering.”

Big banks, big competition

But aside from the economy, which will affect every Canadian equally, perhaps the biggest challenge in the New Year for brokers will be the increased competition from banks.

“As the market slows, margins continue to narrow, and … banks will naturally try to source business with the intent of increasing the profitability of each mortgage transaction,” said Therien, citing banks’ ability to cross-sell, higher funding ratios and overall lower cost per unit as advantages. “A branch-originated mortgage makes better financial sense to banks,” he said.

But as Bozic points out, the mortgage industry has always been rife with competition. “The intensity of the competition may have increased, but brokers will do what they always do — adapt. Brokers have to outperform the competition, which in large part means out-working them. If brokers are committed to do that they’ll get their share,” he said.

Dreyer agrees, adding that it’s important to keep that in perspective.

“If the bank has 75 per cent market share what can we do as independent originators do emulate the success of their behaviour while elevating it to a higher level of service based on our capabilities?” he said.

“If someone gave us a business and said you have 25 per cent market share, find ways to increase your market, wouldn’t we view that as an opportunity? Well that is where we are in this industry. … Not all brokers will make the cut but those that apply themselves to the profession will, and they can advance the public perception to Canadian consumers that will have a positive effect on broker market share.”

Therien takes it a step further, suggesting that “instead of making demands for higher volume bonuses, greater commissions, lower rates and faster response times, we need to examine what we can do, what we can improve upon. What can we do as an industry to better partner with the banks to help improve the profitability of the broker channel?”

Collateral damage?

The adoption of collateral mortgages from some lenders in 2011 was a growing concern for many brokers, with the difficulties in moving the mortgage to a different lender taking front and centre.

“The whole scam is that the mortgage market is going to tighten up so the only way lenders can protect their assets is to get their market,” David O’Gorman, MortgageLand president and Ontario Real Estate college teacher said. “Your clients may be saving $700 in legal fees but their feet are nailed to the fl oor while the house burns down around them.”

He predicts that collateral mortgages will become more widespread, and when they do, “soon enough someone dealing with consumer protection is going to take note,” he said.

While O’Gorman may not be one to mince words, he’s not alone in criticizing collateral mortgages.

“We see anything that constrains the consumer in any way as not being helpful,” Home Trust’s Reid said. “We’re not sure that most consumers are aware of the implications of getting into a collateral mortgage.”

One thing that is debatable about them, however, is the effect it will have on the broker market.

“They will result in one or two things,” predicts McCallum. “One, less switch business for brokers; two, more unhappy bank customers who will fi nd a way to move anyway. Client dissatisfaction is going to be a major selling point going against banks in the coming years.”

But Centum’s Therien says the reason for collateral mortgages falls on brokers. “They’re a response from the lenders to the shortened average life of a mortgage with a lender. Also I believe in part to the increasing instances of brokers churning their books,” he said. “The average time at lender for a broker-originated mortgage is shorter than a bank-originated mortgage, and that affects profitability. The lender almost always ends up being the bad guy for charging a penalty, I am not saying that the lenders have no accountability, but we need to look to ourselves and how our own actions impact our business partners.”

No matter where the blame falls for the emergence of collateral mortgages, one thing’s for certain — if they’re successful, they’ll be here to stay

“In terms of it being good or bad, well, that depends on what side of the fence you are on,” Bozic said. “If the lenders who have announced that they’re moving to a collateral charge maintain or grow their market share, don’t be surprised if more lenders follow.

Working together

In terms of meeting the challenges of 2012 head on, a lot of the brokers and lenders that CMP spoke with stressed the same thing: rather than focusing only on individual numbers, the industry needs to work as one to increase overall awareness.

“Our voice has to be heard by the regulators and the Ministry of Finance,” said Bozic, who, as CAAMP chair, added that it needs to continue building on its lobbying efforts.

It’s something Strong also mentions as a key to success, stressing the consumer angle. “We’ve been asking CAAMP to renew their broker channel communication,” he said, suggesting the idea that “all the firms should contribute to a pool and allow CAAMP to advertise. All the firms should lay down their guns and put money into a pool. It’s hard to do it on our own, whether you advertise on Hockey Night in Canada or not — it’s not enough.”

It’s just one of the ways the broker channel can “cut through the hyperventilation going on out there and focus on facts,” said McCallum. “I think if we can be seen as voices of reason, calm and focused people who recognize the reality out there instead of trying to sell around it, then people will trust us.”

But any efforts the industry may undertake as a whole will have no effect if individual brokers don’t do their parts, which means giving clients the best value-added service, improving efficiencies and funding ratios with lenders, and of course, placing clients with the right lenders for their needs.

“Focus on the best interest of the client fi rst and foremost,” said Therien. “We are at a crossroads: we either go back to being the person you go to when the banks say no as it was 25 years ago, or become truly trusted advisers to our customer and move up to the next level.”

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